Correlation Between China Reform and Road Environment

Can any of the company-specific risk be diversified away by investing in both China Reform and Road Environment at the same time? Although using a correlation coefficient on its own may not help to predict future stock returns, this module helps to understand the diversifiable risk of combining China Reform and Road Environment into the same portfolio, which is an essential part of the fundamental portfolio management process.

By analyzing existing cross correlation between China Reform Health and Road Environment Technology, you can compare the effects of market volatilities on China Reform and Road Environment and check how they will diversify away market risk if combined in the same portfolio for a given time horizon. You can also utilize pair trading strategies of matching a long position in China Reform with a short position of Road Environment. Check out your portfolio center. Please also check ongoing floating volatility patterns of China Reform and Road Environment.

Diversification Opportunities for China Reform and Road Environment

0.7

Correlation Coefficient

China Reform  Road Environment

Poor diversification

The 3 months correlation between China and Road is 0.7. Overlapping area represents the amount of risk that can be diversified away by holding China Reform Health and Road Environment Technology in the same portfolio, assuming nothing else is changed. The correlation between historical prices or returns on Road Environment Tec and China Reform is a relative statistical measure of the degree to which these equity instruments tend to move together. The correlation coefficient measures the extent to which returns on China Reform Health are associated (or correlated) with Road Environment. Values of the correlation coefficient range from -1 to +1, where. The correlation of zero (0) is possible when the price movement of Road Environment Tec has no effect on the direction of China Reform i.e., China Reform and Road Environment go up and down completely randomly.

Pair Corralation between China Reform and Road Environment

Assuming the 90 days trading horizon China Reform Health is expected to generate 1.47 times more return on investment than Road Environment. However, China Reform is 1.47 times more volatile than Road Environment Technology. It trades about 0.03 of its potential returns per unit of risk. Road Environment Technology is currently generating about -0.01 per unit of risk. If you would invest  1,187  in China Reform Health on December 24, 2024 and sell it today you would earn a total of  25.00  from holding China Reform Health or generate 2.11% return on investment over 90 days.

Time Period	3 Months [change]
Direction	Moves Together
Strength	Significant
Accuracy	100.0%
Values	Daily Returns

China Reform Health  vs.  Road Environment Technology

China Reform Health

Risk-Adjusted Performance

Weak

Compared to the overall equity markets, risk-adjusted returns on investments in China Reform Health are ranked lower than 2 (%) of all global equities and portfolios over the last 90 days. Despite somewhat strong basic indicators, China Reform is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Road Environment Tec

Risk-Adjusted Performance

Very Weak

Over the last 90 days Road Environment Technology has generated negative risk-adjusted returns adding no value to investors with long positions. Despite somewhat strong basic indicators, Road Environment is not utilizing all of its potentials. The current stock price disturbance, may contribute to short-term losses for the investors.

Pair Trading with China Reform and Road Environment

The main advantage of trading using opposite China Reform and Road Environment positions is that it hedges away some unsystematic risk. Because of two separate transactions, even if China Reform position performs unexpectedly, Road Environment can make up some of the losses. Pair trading also minimizes risk from directional movements in the market. For example, if an entire industry or sector drops because of unexpected headlines, the short position in Road Environment will offset losses from the drop in Road Environment's long position.

The idea behind China Reform Health and Road Environment Technology pairs trading is to make the combined position market-neutral, meaning the overall market's direction will not affect its win or loss (or potential downside or upside). This can be achieved by designing a pairs trade with two highly correlated stocks or equities that operate in a similar space or sector, making it possible to obtain profits through simple and relatively low-risk investment.

Check out your portfolio center.

Note that this page's information should be used as a complementary analysis to find the right mix of equity instruments to add to your existing portfolios or create a brand new portfolio. You can also try the Efficient Frontier module to plot and analyze your portfolio and positions against risk-return landscape of the market..